Experts to discuss stalled retail bonds

Disappointing development of a retail bond market in Australia has prompted the federal government’s high-powered Australian Financial Centre Forum to call senior industry participants together to discuss barriers to new issuance.

Invitations are going out to select figures for a meeting on October 18 to be chaired by financial services industry veteran
Mark Johnson,
who has run the latest push to develop Australia as a regional financial centre.

The invitations have been sent to the Australian Securities Exchange and select corporate issuers, bankers and lawyers to discuss the retail ­market.

The workshop will examine hold- ups to retail bond issuance, given recent reforms by the Australian Securities and Investments Commission have not led to a meaningful increase in sales.

One of the senior figures involved noted there was universal agreement that a retail bond market was desirable both from the retail centre perspective and to diversify funding in Australia, but “in saying that, how can we get more issuers? More borrowers? Are there deeper issues here?"

ASIC, in conjunction with Treasury, announced measures to allow retail bonds to be made with reduced disclosure and a short-form prospectus in May. “That relief helped but maybe it wasn’t enough," the senior figure said.

Since the ASIC relief measures the only retail bond issue was a $152 million offering from Primary Health Care, which made use of ASIC’s relief.

Those invited to the forum said hold-ups to the market included the cost of selling bonds to retail investors versus institutions and the fact that directors could be held liable for deceptive statements or omissions made in a prospectus.

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The amount of documentation required even in the shortened prospectus and ambiguity over the depth of retail demand for bonds were also cited as hold-ups.

Minter Ellison partner David Eterovic, whose firm was involved in the Primary issue, said there also needed to be greater clarity in the ranking of retail bonds in the hierarchy of senior debt.

“It’s all senior debt but there’s still some opacity in just where it sits in the event of a wind-up," he said.

Mr Eterovic said he was aware of two other retail issues in planning but the numbers were still not what was hoped for.

“Another element which would really help would be some government issues in the retail sector to set benchmarks against which other corporate issues could be priced," he said.

Given ASIC’s relief is already available, some have speculated that the October 18 meeting may signal a broader legislative reform agenda such as an exemption from prospectus liability.

The AFCF has been influential in achieving recent reforms to the retail bond market. It has consulted with bond fund managers, companies, investors and bankers on measures to enliven the market since mid-2009, and creating a diversified bond market was one of the AFCF’s recommendations in a report on Australia as a financial centre earlier this year.

The report said that a more liquid bond market would reduce the reliance upon bank loans and boost the country’s standing as a global financial centre. Greater access to retail debt instruments will also help rebalance retirement savings in Australia.

Mr Johnson, who is also the chairman of AGL Energy, has previously said that greater bond issuance would help diversify the funding mix of Australian companies beyond the banking sector.

A large rise in corporate refinancing in 2012 – around $45 billion of bank loans, capital markets debt and hybrids will need to be refinanced that year, more than twice the amount due this year – is expected to prompt some corporate customers previously reliant on bank loans to consider other options.

Mr Eterovic said funding diversification was also important for the retail market, which currently was enjoying high returns from ordinary bank deposits. “But as that market comes off retail bonds should be well placed to offer the yields retail investors are looking for," he said.

Australia’s domestic corporate debt market is half the size of the United States and European markets, after taking into account the ­relative size of economies.

One debt market expert invited to the October meeting said the industry was keen to enhance existing relief, including an extension of the time allotted to follow-on offerings from the base prospectus to fours years, up from two at present.

They also pointed to the need to bring down the fees related to retail bond issues, given competition from tight pricing in the US private placement market.